Why companies should view financial reporting through the lens of investors
In a globalized and connected world, flows of financial capital can move across continents in search of opportunities to generate profits for investors.
Additionally, as more organizations around the world embrace the global business language for financial reporting, known as International Financial Reporting Standards (IFRS), investors can gain insight into performance and the financial position of an organization.
Therefore, organizations should aim to approach financial reporting from the perspective of investors in order to build trust and attract financial capital. Investors should find financial statements relevant and useful for decision making. Financial statements should meet the information needs of investors by addressing the following points.
Liquidity information is fundamental for investors. Although an organization may report profits in the income statement, liquidity problems could affect the organization’s ability to meet its daily cash obligations and make payments to investors.
Organizations must provide information about off-balance sheet transactions such as off-balance sheet financing and supply financing arrangements that are not on the balance sheet. These provisions could also have an impact on the organization’s financial ratios.
Disclosure of provisions for accounts receivable and credit risk on financial assets is another essential element that investors find particularly useful in financial statements. Investors want to understand the judgments applied and the impact on the organization’s cash flow.
Investors would also seek information on loan covenants, terms and how financial ratios are determined. Organizations should ensure that other performance measures disclosed include information on their adequacy, relevance and deviations from previous years.
Investors are also keen to get information about an organization’s vision for the future. Organizations should provide information about the future scenarios they envision, the variables and judgment involved, and the consequences of decisions. Here is some of the information that investors consider important.
Investors want clarity, honesty and transparency as well as quick access to information. Organizations should consider the perspective of investors when preparing their financial statements.